Daily Market Commentary

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2340 level and was supported around the $1.2155 level. The common currency pushed higher after China indicated it will continue to be a long-term investor in euro-denominated assets, contrasting with market chatter that suggested China would reduce exposure to longer-term euro assets. On the other hand, Kuwait Investment Authority noted it may reduce its investments in the eurozone. European Central Bank member Nowotny said he does “not see any risks that are endangering” the ECB’s “near 2%” inflation target. ECB member Gonzalez-Paramo said the ECB’s “arsenal has not been exhausted…our capacity to act…is unlimited.” The ECB reported eurozone banks deposited €294.5 billion with it overnight. Formber Bundesbank President Schlesinger said the euro is “not in danger” and it’s level “is not catastrophically low.” Spain’s parliament today approved a €15 billion austerity package. Data released in Germany today saw provisional May consumer price inflation data for German states come in at or above expectations. National CPI was up 0.1% m/m and 1.2% y/y with the harmonized level up the same amounts. Also, the French May consumer confidence indicator ticked lower to -38 from -37. In U.S. news, Richmond Fed President Lacker said the U.S. economy will continue to expand. Lacker also said he is “decreasingly comfortable” with the Fed’s commitment to keep rates low for an “extended period.” St. Louis Fed President Bullard reported he does “not see” how European contagion could occur in the U.S” and said “consumers are generally feeling better about the U.S. economy.” Data released in the U.S. today saw Q1 gross domestic product up an annualized 3.0% q/q rate, down from the prior reading of 3.2% q/q as consumption was reduced lower. Also, the Q1 GDP price index improved to 1.0% and core PCE was up 0.6% q/q. Additionally, weekly initial jobless claims fell to +460,000 while continuing jobless claims fell back to 4.607 million. Euro offers are cited around the US$ 1.2620 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.60 level and was supported around the ¥89.80 level. Some risk appetite returned to the market today after China indicated it is not reducing its diversification into euro-denominated assets and this led to a weaker yen. Fed Chairman Bernanke spoke in Tokyo yesterday and said “Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less-stable economy and higher inflation.” Bank of Japan Governor Shirakawa reported “Price stability is certainly one important element in achieving a stable financial environment. That is, however, not the sole factor.” Minutes of the 30 April BoJ Policy Board meeting yesterday revealed the BoJ should “devise ways to avoid its excessive involvement in resource allocation among individual firms.” Data released in Japan overnight saw the April merchandise trade balance fall to ¥742.3 billion. Data to be released tonight include household spending, employment numbers, and consumer price inflation. The Nikkei 225 stock index climbed 1.23% to close at ¥9,639.72. U.S. dollar offers are cited around the ¥96.85 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥111.50 level and was supported around the ¥109.20 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥131.95 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥78.70 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8312 in the over-the-counter market, up from CNY 6.8290. The State Administration of Foreign Exchange reported Europe will remain a major investment market for China, countering speculation China would reduce its euro-denominated holdings. People’s Bank of China increased interest rates on three-month bills for a second consecutive auction, the latest evidence the central bank is absorbing excess liquidity at higher interest rates. Yuan forwards continued to rebound after an eight-month low earlier in the week as traders speculated China will revalue its yuan. U.S. Treasury Secretary Geithner this week said revaluating the yuan is “absolutely” in China’s best interest.

£

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4585 level and was supported around the $1.4365 level. Data released in the U.K. today saw the May distributive trades survey print at -18, an unexpected drop. Data to be released in the U.K. tonight include the May GfK consumer confidence survey. Bank of England will expand its long-term funding mechanism next month and will incorporate a two-tier auction system that accepts a wider array of collateral to address stresses in the financial system. Chancellor of the Exchequer Osborne this week reported the new Cameron government hopes to decrease fiscal spending by at least £6 billion in what would be an abrupt shift from the policies of former Prime Minister Brown. Cable bids are cited around the US$ 1.4110 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8510 level and was supported around the £0.8420 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1500 figure and was capped around the CHF 1.1615 level. Data released in Switzerland today saw the Q1 employment level remain steady at 3.961 million with the employment level up 0.1% y/y. April trade balance data will be released tomorrow followed by the May KOF Swiss leading indicator. U.S. dollar bids are cited around the US$ 1.1110 level. The euro gained ground vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4220 level while the British pound gained ground vis-à-vis the Swiss franc and tested offers around the CHF 1.6830 level.